Is a Professional Qualified Intermediary Required?

Many real estate professionals advise their clients that a professional qualified intermediary is not required if they close their purchase and sale concurrently.  This is true, PROVIDED, the two owners of property want each other’s property and/or one of the “cooperating” parties agrees to acquire FEE TITLE in the exchange property! 

“This rarely happens.”

To qualify for non-recognition of gain, some basic criteria must be met:

Basic Criteria

1. There must be a trade between two parties.
2. The Investor’s access to the proceeds from the sale must be restricted via a written exchange agreement.
3. The accommodating party must acquire (from the Investor) and transfer (to the buyer) the relinquished property, and acquire (from the seller) and transfer (to the Investor) the replacement property

This could be done by the buyer or seller of one of the properties involved in the exchange, or it could be a professional Qualified Intermediary.  In either event, both (“accommodators”) are subject to the same regulations.

Options

There are two options to create a trade between two parties:

1. Sequential Deeding.  The accommodating party acquires and transfers each property by going through the chain of title via sequential deeding.  (Few professionals qualified intermediaries are willing to accept this liability, rarely would an individual who just wants to buy or sell a property be willing to accept this risk.)
2. Direct Deeding.  The potential liability of sequential deeding can be avoided by using direct deeding, provided the accommodating party::

• Acquires and transfers the relinquished property via an assignment of the purchase contract; and
• Acquires and transfers the replacement property via an assignment of the purchase contract;  and
• Enters into an exchange agreement to perform specific duties and to restrict the Investor’s access to the sale proceeds in order of the exchange to qualify for tax deferral. 

(This is the documentation the professional qualified intermediary provides, as well as security of the exchange proceeds in the event he closing does not occur simultaneously.)

The Professional Qualified Intermediary

In agreeing to cooperate with an investor planning to do an exchange, rarely is the cooperative party prepared to assume the liability of going through the chain of title on unfamiliar property, nor are they qualified to prepare assignments and exchange agreements to comply with the regulations.  Also, these are specialized documents that cannot be prepared by the escrow or settlement agent, unless they have a division that is a Qualified Intermediary.

The investor is trying to save the fee…

The advantages of using a professional qualified intermediary are numerous:

1. The potential liability for the structure of the exchange (i.e. tax consequence) is greatly reduced for all parties (closer, broker, buyer or seller).
2. All principals (buyer, seller and investor) are shielded from accepting additional liability.
3. Provides a defensible paper trail via the assignments and exchange agreement in the event of an audit

He could be hit with a large tax bill.